Potential home buyers in cities with white-hot real estate markets got some relief in Tuesday’s federal budget with an incentive program that could lower mortgage payments for households making less than $120,000 per year.

The government unveiled a multi-pronged approach to housing affordability that centres on the incentive plan, but beefs up an existing initiative that allows buyers to withdraw money from their RRSPs, and a variety of measures to boost the supply of homes on the Canadian market.

Opposition MPs and the real estate industry have been pleading with the government to do something to help younger buyers shut out of markets in cities such as Toronto and Vancouver. Some have suggested relaxing the mortgage stress test, which requires those seeking a loan to prove they can afford payments on a loan with interest rates two percentage points higher than the Bank of Canada rate, as a possible solution.

Finance Minister Bill Morneau said the government was trying very carefully to tweak policy to create more first-time home buyers without juicing the market too much.

“We’re exactly dealing with the challenge people face in getting into a new home,” Morneau said.

Finance Minister Bill MorneauNational Post

Under the $1.25-billion incentive program, prospective buyers who have the minimum down payment for a home can apply to finance between five and 10 per cent of their mortgage via a shared equity program administered by Canada Mortgage and Housing Corporation (CMHC). The 10 per cent cap applies to newly constructed homes.

Morneau said the larger credit on new homes should help increase the supply of housing in cities such as Toronto and Vancouver, where demand has caused prices to skyrocket. The money from the incentive program would eventually need to be repaid, but details about that process were not released.

The government is also increasing the amount that first-time buyers can withdraw from their RRSPs, from $25,000 per individual to $35,000 — or $70,000 per couple. That limit hasn’t been adjusted for 10 years, despite consistent growth in the housing market.

The finance department hopes legislation for the new program will pass in time for a September launch. Some critics say the measures could actually make the affordability problem worse. “It’s more debt for a segment of the population that doesn’t need any more of it,” Francis Fong, chief economist with the Chartered Professional Accountants of Canada, said.

Fong said the incentive will create more housing demand, which will mean there’s more competition for the same limited housing stock. Without more measures on the supply side, that will simply boost prices.

“If demand was sufficient to create its own supply it already would have happened,” he said.

Housing affordability is a key issue for the Liberals ahead of an expected election campaign in October. Some 64 per cent of millennials told Abacus Data last fall that it was the issue the federal government should prioritize.

To address supply issues, the government announced it will be extending a program that provides favourable financing to developers building rental properties for lower and middle income Canadians. The funding boost will open up about $10 billion in loans over the next nine years. The finance department expects the increase to spur about 42,500 new units, particularly in areas with low vacancy rates.

The government is also launching a “housing supply challenge” which will encourage municipalities and other organizations to “propose new ways to break down barriers that limit the creation of new housing.” About $300 million is earmarked for those initiatives.

The budget also revealed plans to crack down on tax compliance issues related to real estate speculation, which the government says reduces affordability for everyone in the market.

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